Westminster Village North, a nursing home and retirementcommunity in Indianapolis, recently added 25 beds and two kitchensto speed food delivery to residents. It also redesigned patientrooms to ease wheelchair use and added Wi-Fi and flat-screentelevisions. This fall, it’s opening a new assisted livingunit.

“We have seen amazing changes and created a more home-likeenvironment for our residents,” said Shelley Rauch, executivedirector of the home.

Related: Outpatient drug therapies shift from physician tohospital setting

The nursing home can afford these multimillion-dollarimprovements partly because it has, for the past five years, beencollecting significantly higher reimbursement rates from Medicaid, thestate-federal health insurance program for the poor. About half ofits residents are covered by the program.

In 2012, the nursing facility was leased to Hancock RegionalHospital, a county-owned hospital 15 miles away. The lease lets ittake advantage of a wrinkle in Medicaid’s complex funding formulathat gives Indiana nursing homes owned or leased by city orcounty governments a funding boost. For Indiana, that translates to30 percent more federal dollars per Medicaid resident. But thatmoney is sent to the hospitals, which negotiate with the nursinghomes on how to divide the funding.

Nearly 90 percent of the state’s 554 nursing homes have beenleased or sold to county hospitals, state records show, bringing inhundreds of millions in extra federal payments to the state.

Even though Indiana’s nursing home population has remainedsteady at about 39,000 people over the past five years, Medicaidspending for the homes has increased by $900 million, in large partbecause of the extra federal dollars, according to state data.Total spending on Indiana nursing homes was $2.2 billion in2016.

The funding enhancements were pioneered in Indiana, buthospitals in several other states, including Pennsylvania andMichigan, have also used the process. Advocates say it has been akey factor in helping to keep Indiana’s city and county hospitalseconomically vital at a time when many rural hospitals nationwideare facing serious financial difficulties.

But critics argue that the money flow has not significantlyimproved nursing home quality and has slowed adoption of communityand home health services.

More than two-thirds of Indiana’s Medicaid long-term-caredollars go to nursing homes, compared with the U.S. average of 47percent.

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Kaiser HealthNews (KHN) is a national health policy news service. It isan editorially independent program of the Henry J. Kaiser FamilyFoundation.

Joe Moser, who until May was Indiana’s Medicaid director, saidwhile in office that the hospital-nursing home marriages werepartly responsible for keeping more people in nursing homes. “It isa factor that has contributed to our imbalance,” he said.

Daniel Hatcher, a law professor at the University of Baltimoreand author of last year’s “The Poverty Industry,” said this fundingarrangement is a bad deal for the poor and undercuts the purpose ofthe Medicaid program. “The state is using an illusory practice andtaking away money from low-income elderly individuals who areliving in poor performing nursing homes,” he said. He noted Indianais ranked near the bottom of states for nursing home quality byseveral government and private reports.

But proponents of the practice say that even when hospitals getmost of the money, it is well spent.

Marion County Hospital and Health Corp., the large safety-nethospital system in Indianapolis, owns or leases 78 nursing homesacross the state, more than any other county hospital.

Sheila Guenin, vice president of long-term care there, said thehospital keeps 75 percent of the additional Medicaid dollars andthe nursing homes get the rest. Still, the additional money hasimproved care. The transfer of the license to the hospital has keptseveral nursing homes from closing and increased staffing rates atmany others, she said.

About 40 percent of the county hospital’s nursing homes havefive-star ratings from the federal government, up substantiallyfrom 10 years ago, she said. Among the improvements at the nursinghomes were the addition of electronic health records as well ashigh-capacity emergency generators to provide power in case of anatural disaster.

Still, some patient advocates said the extra funding is flowingto hospitals and nursing homes with little public accounting. RonFlickinger, a regional long-term-care ombudsman in Indiana, said,“A lot of extra money is being spent here, but I’m not surepatients have seen it benefit them.”

Practice dates to 2003

Medicaid, which typically covers about two-thirds of nursinghome residents, is jointly financed by the federal and stategovernments. States pay no more than half of the costs, althoughthe federal match varies based on a state’s wealth. In Indiana thefederal government covers about two-thirds of Medicaid costs.

The enhanced nursing home payments began in 2003 when afinancially strapped Indianapolis hospital owned by the county tookadvantage of the Medicaid funding provision to bolster its bottomline. In this case, the hospital purchased a nursing home, thenprovided the money for the state to increase what it spent on thehome to the federally allowed maximum.

That increase, in turn, drew down more federal matchingfunds. Since the federal remittance is larger than thehospital contribution, the hospital got back its initial investmentand divided the extra money with the nursing home.

Other county-owned hospitals in Indiana slowly followedsuit.

Hatcher said Indiana government leaders embraced the fundingarrangement because it let them avoid the politically difficultstep of raising taxes to increase state funding to improve care atnursing homes. “It’s a revenue generator for the state andcounties,” he said.

All the Medicaid funding for nursing homes should be going tothose homes to care for the poor, not shared with hospitals to useas they choose, he added.

The strategy, promoted by consultants advising hospitals andnursing homes in Indiana, is used heavily there because of theplethora of county-owned hospitals. But the federal government istightening the rules about such payments.

Texas has secured Medicaid approval for a similar strategy startingthis month, but federal officials have made the extra fundingdependent on nursing homes meeting quality measures, such asreducing falls. Oklahoma is seeking to get federalapproval as well.

And in a rule released last year, the federal Centers forMedicare & Medicaid Services announced that it would graduallyforce states to shift to payment systems that tie suchreimbursements to quality of care. Michael Grubbs, an Indianahealth consultant, said that rule does not stop the Indianahospital funding program, but it’s unclear that it will last.

Nursing home operators in Indiana say the financing arrangementhas helped them keep up with rising costs and improve care forresidents.

Zach Cattell, president of the Indiana Health Care Association,a nursing home trade group, noted the number of nursing homes inthe state earning Medicare’s top, five-star rating has increased 9percentage points since 2011. He said the percentage ofhigh-risk residents with pressure ulcers and those physicallyrestrained also dropped significantly.

An Opportunity Or A Loophole?

In Indiana, the small, county-run rural hospitals generally arenot facing the financial threat that has become common elsewhere,in part because of the extra Medicaid funding gained from buyingnursing homes, hospital officials say.

“The money has meant a great deal to us,” said Gregg Malot,director of business development at Pulaski Memorial Hospital innorthern Indiana. “I don’t see this as a loophole but see it as anopportunity for small rural community hospitals to improve ourquality and access to care.”

His hospital is the only one in Pulaski County. The extraMedicaid revenue from acquiring 10 nursing homes statewide — about$2 million a year — has helped finance the hospital’sobstetrics care and the purchase of the hospital’s first MRI, sodoctors don’t have to rely on a mobile unit that used to come twicea week, he said. The hospital also spent some of the funding to adda centralized telemetry unit to monitor patients.

Steve Long, CEO of Hancock Regional Hospital in Greenfield,Ind., said his hospital recently built two fitness centers in thecounty with help from its extra Medicaid dollars. “This would notbe possible without the additional funding.”

He rejects the notion that additional Medicaid money reduces thehospital’s incentive to add home- and community-based care in thecommunity. He said new Medicare financing arrangements, such asaccountable care organizations, give the hospital motivation tofind the most efficient ways to care for patients after they leavethe hospital.

But he acknowledged the hospital benefits from seeing morepatients go to nursing homes licensed under its name.

“Welcome to health care — it’s a complex and confusingenvironment where we have all different competing incentives,” Longsaid.

Kaiser HealthNews (KHN) is a national health policy news service. It is aneditorially independent program of the Henry J. Kaiser FamilyFoundation.